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on Open Economy Macroeconomics |
| By: | Froemel, Maren (Bank of England); Paczos, Wojtek (Cardiff Business School) |
| Abstract: | This paper explores the link between default risk and fiscal procyclicality. We show that countries with higher sovereign risk have a more procyclical fiscal expenditure policy, which is driven mostly by transfers. We build a small open economy model with income inequality, social transfers, and default risk to rationalize this fact. Without default risk transfers are countercyclical, inequality is procyclical, and external debt is used to smooth distortionary taxation. With default risk, transfers account for most of fiscal adjustment because taxation becomes costly for the government. Transfers become procyclical and inequality worsens during times when risk premia are high. We confirm the predictions of the model in the data: in recessions in economies with default risk, transfers take the bigger burden relative to government consumption, whereas the opposite is true in economies with low default risk. |
| Keywords: | fiscal policy, default risk, income inequality, redistribution, emerging markets |
| JEL: | E62 F34 F41 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2024/3&r=opm |
| By: | Paczos, Wojtek (Cardiff Business School); Shakhnov, (†University of Surrey) |
| Abstract: | Sovereigns issue debt on both domestic and foreign markets and the two debts are uncorrelated in the data. Sovereigns default mostly selectively. We propose a theory to rationalize these observations. A government chooses the optimal combination of two debts to smooth consumption, which is subject to output shock and volatile tax distortions. In equilibrium, it mostly relies on domestic debt to smooth the tax wedge and on foreign debt to smooth the output shock. Issuing either debt is less costly than raising taxes, but it is subject to default risk due to the government’s limited commitment. A quantitative, calibrated model with two shocks and two debts replicates well debt-to-GDP ratios, default frequencies, cyclical properties of emerging economies and behavior of aggregates around default episodes. |
| Keywords: | sovereign debt, selective default, debt composition |
| JEL: | F34 G15 H63 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2024/6&r=opm |
| By: | Kai Arvai; Nuno Coimbra |
| Abstract: | How does a country obtain the status of a safe haven with a dominant global currency? This paper argues that size matters: as a country becomes larger and more diversified, the underlying shock process of the economy becomes less variable. Shocks that can drive a government to default become less likely, implying lower default probability, lower interest rates and higher debt-to-GDP. Furthermore, the larger a country’s share in the supply of global safe assets, the more liquid and attractive its bonds are for investors. If the dominant currency country grows less than the rest of the world, its status as a safe haven erodes and interest rate differentials decline. This could explain the recent evidence of shrinking US return differentials on its cross-border bond portfolios. |
| Keywords: | Dominant Currency, Safe Assets, US Dollar, Default |
| JEL: | E42 F02 F33 N10 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:932&r=opm |
| By: | LIU Nan; SATO Kiyotaka |
| Abstract: | This paper empirically investigates whether Japanese exporters have changed their exchange rate pass-through (ERPT) behavior in response to large fluctuations of the yen from January 2000 to December 2022. A novel development of this study is that it incorporates exchange rate prediction errors into a nonlinear autoregressive distributed lag (NARDL) model with multiple thresholds, which enables us to rigorously distinguish not only between strong yen and weak yen periods but also between phases of unexpected yen appreciation and depreciation. We find asymmetric ERPT between the periods of strong yen and weak yen in level. More intriguingly, Japanese exporters, especially in general machinery and transport equipment industries, strategically switch their pricing behavior from ERPT to pricing-to-market (PTM) and vice versa in response to unexpected yen appreciation and depreciation. Our empirical findings have significant implications for better pricing strategies by Japanese export firms in the face of sudden, large exchange rate changes. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24008&r=opm |
| By: | Ambrocio, Gene; Hasan, Iftekhar; Li, Xiang |
| Abstract: | We study the implications of forging stronger political ties with the US on the sensitivities of stock returns around the world to a global common factor - the global financial cycle. Using voting patterns at the United Nations as a measure of political ties with the US along with various measures of the global financial cycle, we document evidence indicating that stronger political ties with the US amplify the sensitivities of stock returns in developing countries to the global financial cycle. We explore several channels and find that a deepening of financial linkages along with a reduction in information asymmetries and an amplification of sentiment are potentially important factors behind this result. |
| Keywords: | global financial cycle, international spillovers, political ties, stock returns |
| JEL: | E44 F30 F50 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:281192&r=opm |
| By: | Arigoni, Filippo (Central Bank of Ireland); Lenarcic, Crt (Banka Slovenije) |
| Abstract: | This paper estimates a Bayesian VAR model on Euro area data and quantifies the reaction of real activity to economic policy uncertainty shocks that originate abroad. Our findings show that US and Chinese uncertainty explains larger shares of fluctuations than European uncertainty. In an extended set-up, we perform a counterfactual simulation and verify the presence of a foreign economic policy uncertainty spillovers channel that magnifies the real effects of US and Chinese uncertainty shocks. The simulation also documents a non-negligible role played by bilateral trading activities in the transmission mechanism of Chinese shocks. In an application with Dutch data, we highlight that structural domestic factors shape region and country-specific uncertainty in the propagation of foreign economic policy uncertainty shocks onto the economy. |
| Keywords: | Uncertainty shocks, Euro area spillovers, real activity, US, China, Bayesian VAR. |
| JEL: | C32 E30 Q54 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:7/rt/23&r=opm |
| By: | ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko; YOSHIMI Taiyo |
| Abstract: | This paper reports the main results of the RIETI survey conducted in FY2021 regarding the choice of invoice currency and currency risk management efforts of Japanese exporters. We sent the questionnaire items to the 929 manufacturing companies that are engaged in overseas operations and listed on the Tokyo Stock Exchange (TSE). Based on the survey results, we report various aspects of respondent firms regarding the choice of invoice currency, currency risk management, and price revisions under exchange rate fluctuations. The main results are as follows. First, in terms of exports from Japan to the world, the share of the US dollar in exports by Japanese exporters remains around 50 percent while the share of the Japanese yen marginally increased to 41 percent; second, the share of other currencies, which mainly includes Asian currencies, reached 6 percent, and surpassed the share of the euro for the first time in our surveys; third, regarding currency risk management, the percentage of firms using currency risk hedging through the market, including currency forward contracts and currency options, significantly declined to 80 percent from above 90 percent in previous surveys; fourth, the survey confirms that firms are more reluctant to change their price when anticipating yen depreciation than when anticipating yen appreciation; and fifth, by using the data of invoice currency choice by destination, we observe a steep increase in the usage of Asian currencies in exports and imports, especially the Chinese yuan, Thai baht and Indian rupee. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:24004&r=opm |
| By: | Boris Blagov; Maximilian Dirks; Michael Funke |
| Abstract: | Using Russia as a case study and a global VAR model as a methodological tool, we analyze how heightened geopolitical risk shocks propagate across advanced economies and quantify the economic effects of these events. The global VAR impulse response functions in response to the skyrocketing Russian geo-political risk shock after Russia’s invasion of Ukraine revealed a contraction of GDP and an increase in inflation. Eastern European neighboring countries are particularly affected by the Russian geopolitical risk shock. We also document a strong component of the Russian geopolitical risk shock that is not driven by fossil fuel prices. |
| Keywords: | geopolitical risk, international business cycle transmission, global VAR model, Russia |
| JEL: | C32 E32 F51 F52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10880&r=opm |
| By: | Benjamín García; Mario Giarda; Carlos Lizama; Damian Romero |
| Abstract: | We examine the impact of income heterogeneity on macroeconomic dynamics by analyzing households' expenditure decisions across different goods over the business cycle. Using Chilean transaction-level expenditure data, we observe income-dependent systematic variations in expenditure shares over the business cycle, suggesting a relevant role for non-homothetic preferences. We embed these preferences into a Heterogeneous Agent New Keynesian model and analyze their influence on the transmission of fiscal transfers. We find two novel channels associated with non-homotheticities: aggregate consumption sensitivity to income and insurance through expenditure switching. In a calibration for Chile, we find that non-homotheticities lead to substantial amplification of the effects of fiscal transfers of up to fifty percent. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:1000&r=opm |
| By: | Lee, King Fuei |
| Abstract: | This study investigates the relationship between monetary policy frameworks and stock market volatilities across countries. Using a novel classification framework by Cobham (2021), we study 84 countries across the world over the period of 1984 to 2017. We find that countries that maintain a fixed exchange rate peg tend to experience higher levels of stock market volatility, while countries adopting flexible inflation-targeting policies tend to exhibit lower levels of stock market volatilities. Additionally, the stock markets of countries operating under monetary policies characterized by unstructured discretion tend to be more volatile, while those operating with well-structured discretion tend to be more stable. Our results also suggest that while the choice of monetary policy framework is an important determinant of stock market volatility, it is not the only factor driving it. As such, policymakers should carefully consider the implications of different monetary policy frameworks when designing monetary policy, and take a holistic approach to financial stability that incorporates a range of factors beyond just monetary policy frameworks. |
| Keywords: | Monetary Policy Frameworks, Stock Market Volatility, Exchange Regimes, Inflation-Targeting |
| JEL: | E42 G10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119755&r=opm |
| By: | Robert C. M. Beyer; Ms. Ruo Chen; Florian Misch; Claire Li; Ezgi O. Ozturk; Mr. Lev Ratnovski |
| Abstract: | The extent to which changes in monetary policy rates lead to changes in loan and deposit rates for households and firms, referred to as ‘pass-through’, is an important ingredient of monetary policy transmission to output and prices. Using data on seven different bank interest rates in 30 European countries, different approaches, and the full sample as well as a subsample of euro area countries, we show that a) the pass-through in the post-pandemic hiking cycle has been heterogenous across countries and types of interest rates; b) the pass-through has generally been weaker and slower, except for rates of non-financial corporation loans and time deposits in euro area countries; c) differences in pass-through over time and across countries for most deposit rates are correlated with financial sector concentration, liquidity, and loan opportunities, and d) the effects of pass-through to outstanding mortgage rates on monetary transmission on prices and output are heterogenous across countries. |
| Keywords: | Monetary Policy Transmission; Monetary Policy Pass-Through |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/009&r=opm |
| By: | Hémous, David; Lepot, Simon; Sampson, Thomas; Schärer, Julian |
| Abstract: | This paper provides a first comprehensive quantitative analysis of optimal patent policy in the global economy. We introduce a new framework, which combines trade and growth theory into a tractable tool for quantitative research. Our application delivers three main results. First, the potential gains from international cooperation over patent policies are large. Second, only a small share of these gains has been realized so far. And third, the WTO's TRIPS agreement has been counterproductive, slightly reducing welfare in the Global South and for the world. Overall, there is substantial scope for policy reform. |
| Keywords: | trade policy; innovation; growth; patents; TRIPS |
| JEL: | F13 F43 O34 |
| Date: | 2023–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121295&r=opm |